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Sunday, September 06, 2009

Gee, what could go wrong here?

My ordinary life insurance policy aligns my interests (living long) with the insurance company's interests (if I live a long time, they make more money). But what if this reverses, and the insurance industry thinks I'm better off dead? It might soon happen according to the New York Times.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Life settlements have been around for a while -- they were particularly popular among AIDS victims, who needed medical help and whose only assets eventually were that life insurance policy. These were sold to private investors or back to the insurance company.